Norms for VCs may be overhauled

The government is likely to revisit the norms for venture capital funds and talks have been held with the market regulator Securities and Exchange Board of India (Sebi) in this regard, a Finance Ministry official said.

“We have already held talks with Sebi and catalogued the practices followed in other countries such as Israel for regulation of venture capital funds,” said KP Krishnan, joint secretary in the Ministry of Finance, while talking to reporters on the sidelines of the launch of Venture Capital Association of India (VCAI).

Instead of limiting VC investments in certain areas, there was a need to look at them from the point of view of investment risks, Krishnan pointed out.

Venture capital fund is private equity capital typically provided to high potential growth companies. The returns would be eventually generated through an IPO or trade sale.

There was a need to provide a level-playing field to the domestic venture capital funds vis-a-vis their foreign counterparts with respect to tax benefits and capital requirement norms. The restriction barring the venture capital funds from investing more than one third of their funds in equity was also unnecessary, Krishnan stressed.

Speaking on the occasion, Sebi’s wholetime member T C Nair admitted that the regulator had no clue about the number of VC funds operating in India or the amount of money deployed by them. Expressing concerns over the deployment of funds in select areas such as IT and retail, Nair said the market regulator was in favour of balancing investments by these funds across different sectors.

“There is a growing tendency among venture funds to enjoy large benefits in the shortest possible time,” he said, adding about 100 funds had so far registered with the regulator. However, he denied any moves to issue guidelines for VCs. Finance Minister P Chidambaram in his Budget 2007-08 had proposed to limit tax benefits to VCs for investing in biotech, IT, nanotechnology, seed research and R&D to create new chemical entities in pharma, dairying, poultry, biofuels and hotel-cum-convention centres with more than 3,000 seats.

The Reserve Bank also reportedly wants the government to restrict the scope of foreign venture funds by limiting their operations to nine specified sectors proposed in budget 2007-08.

Claiming that VC investment could go up by as much 50 per cent this year, VCAI Co-Chairperson Kalpana Jain said the investment by VCs in India have gone up from $274.98 million in 20 deals in 2005 to over $927 million in 80 deals in 2007.